New strength in rent

Sunday Business Post - Property Cover Feature - April 29 2007

With prices static and in some cases falling and rents on the way up, is now a good time to consider buy-to-let? Dermot Corrigan reports.

The past year has seen continued strong growth in demand for rented property in Dublin. At the same time, the well-documented slowdown in the residential property market has meant that potential investors have a huge choice of properties open to them.

The question for these potential investors is whether there is a window of opportunity to get into the market at what could seem like bargain prices in a year a two, or whether the current uncertainty surrounding house prices means they should be more cautious. Jim Power, chief economist with Friends First, believes demand will remain strong in the rental market.

‘During the year to March, private sector rents went up by over 10 per cent. I feel that demand in the rental market will persist because of our growing population and strong inward migration,” he said.



A report released last month by property portal Daft.ie put the annual rate of growth in rents at 10.5 per cent between February 2006 and February 2007.This is the fastest growth rate since the Daft.ie index was introduced in 2002. The report found that, while rents had been increasing since the end of 2004, it was not until mid-2006 that the pace of growth grew into double digit figures.

According to Daft.ie, the nationwide average rent is now €1,334,the highest level since January 2002. A number of factors are combining to push rents up to this level - one is inward migration, which according to Power, looks set to continue for the foreseeable future.

‘‘If you are looking at 80,000 migrants coming into the country each year, they have to live somewhere,” he said.

The current uncertainty around interest rate increases and stamp duty changes is another factor impacting on the buy-to-let market, simultaneously depressing prices while increasing rental demand.

‘‘Some prospective first-time buyers are considering whether they can afford to purchase in the city centre or south Co Dublin - renting in those areas is perhaps a more affordable option for them, and that has helped to push rents up,” said Geoff Tucker, economist with Hooke & MacDonald.

According to the latest Daft.ie report released last month, the highest national jump in rents in the past year occurred in Dublin 2.The average rent for a one-bedroom home in the area increased by a staggering 24.3 per cent to an average of €1,234 per month; two-beds were up by 19.7 per cent to €1,679 per month.

‘‘We have seen rents rising in the Dublin 2 and Dublin 4 areas,” said Tucker. ‘‘A lot of developments that have been sold over the last two to three years are now coming onto the rental market. They offer a higher spec of accommodation and can command above-average rents.”

Tucker said that in the docklands, penthouse two-beds with waterfront views are renting for more than €2,000 a month. At the moment, investors can expect to pay upwards of €450,000 for new one-bedroom apartments in the docklands; tw o-beds are selling for more than €500,000 while three-beds cost from €750,000.

Another area where rents are performing well is Sandyford. The Daft.ie report found that the average rent for a two-bedroom apartment in Dublin 18 rose by 18.8 per cent to €1,574 per month.

Dublin 18 includes Sandyford, Stepaside, Kilternan and Carrickmines. These locations benefit from proximity to major employers and good transport links, such as the Luas and M50.

‘‘Sandyford is one of those areas where the rental market is going to really thrive,” said Tucker. ‘‘There are very few residential units that have been completed there yet, although there are quite a few developments that are on the market at the moment.”

Among the schemes on the market in the area at the moment is Rockbrook, which is situated directly opposite the Stillorgan Luas stop and offers one-bed apartments from €370,000 and three-beds from €625,000.These will be ready to rent from the end of this year into spring next year.

Potential investors should be aware that the increases being seen in Dublin rents are not evenly spread across all of the city or county. Rents for one-beds in Dublin 7, for example, grew by a relatively low 4.3 per cent, while two-beds in Dublin 13 and Dublin 7, three-beds in Dublin 24 and two-beds in Dublin 11 all experienced rental growth rates of less than 7 per cent last year.

However, Tucker said that this did not mean that buy-to-let investors should only concentrate on plusher southside postcodes - for example, rents for three-beds in Dublin 15 grew by 17.2 per cent.

‘‘Ballymun is another interesting area,’’ said Tucker. ‘‘Over the last 12 to 18 months we have seen a private rental market develop there; a number of developments have been completed and the rental market has really taken off. In particular, properties situated close to the proposed Metro North line are worth looking at.”

At the moment, one-bed Section 23 apartments in Ballymun can be bought for under €300,000, while two-beds are selling for under €350,000. Tucker said that investors now make up 26 per cent of all new home purchases in the greater Dublin area.

Yields

The Daft.ie report said that rental yields had increased for almost all accommodation types in Dublin in the last 12 months. The average rental yield for properties in Dublin is between 3.4 and 4 per cent, with the highest yields for properties in south Co Dublin.

‘‘Yields at the moment seem to depend on the location, but they have shifted upwards, particularly over the last six months,” said Tucker.

‘‘This reflects the moderation in price growth we have seen, combined with a stronger growth in rents. You will probably see yields edge upwards towards the 5 per cent mark by the end of this year.”

However, Tucker said that the majority of investors did not focus closely on rental yields. ‘‘Most investors are not overly dependent on surplus rental income,” he said.

‘‘They are getting into the market with the objective of long-term capital gain.”

Outside Dublin

Rents and yields are also rising inmost locations outside of Dublin, with particularly high rates of growth in certain towns around the country.

A new report from the estate agents network, Real Estate Alliance, has found that parts of Cork city, Trim, Navan, Maynooth and Monaghan are experiencing above-average growth in rents.

‘‘Yields are pretty much up across the board,” said Healy Hynes, vice-chairman of Real Estate Alliance. ‘‘They are particularly high in locations that are experiencing higher inward migration, are close to industries or that have been earmarked for decentralisation.”

Hynes said that recent job creation in the Monaghan area had helped rents rise by between 10 and 12 per cent in the last year. The Real Estate Alliance research showed that a property in Monaghan costing €270,000 would give a monthly rental return of €800, an annual yield of 3.55 per cent.

Investors should also be aware of the impact of decentralisation projects, said Hynes. For example, Tubbercurry in Co Sligo has seen a significant increase in rental interest due to the relocation of the Department of Community, Rural and Gaeltacht Affairs.

A property there costing €185,000 will bring in €600 a month in rent, giving an annual yield of 3.89 per cent.

Hynes said that other locations showing significant rental yields included Longford town, Killarney, Leitrim, Nenagh and Mullingar. According to Power, investors should look to the National Development Plan to see which areas will experience continued rental demand over the medium to long term.

‘‘The plan will give a significant economic boost to particular regions around the country,” he said. ‘‘For example, the road infrastructure to the south-east is going to be improved, so Waterford should benefit. The midlands should be opened up as well.”

Long-term view

Tucker said recent media speculation about stamp duty changes and market crash landings had not impacted greatly on the residential investor market.

‘‘A lot of the stamp duty debate has been about reducing the rates to help owner occupiers, whereas investors are ultimately driven by their expectations of the future prospects of the market,” he said.

‘‘Experienced investors are still confident about the long-term prospects.”

Research by Hooke & MacDonald has found that 43 per cent of investors are buying residential property for pension purposes, while 20 per cent are buying as a nest egg for children.

The research also found that 73 per cent of investors plan to hold onto their properties for more than five years, and half for more than ten.

Power said that buy-to-let investors should have realistic expectations of the likely appreciation of their properties in the next few years. ‘‘I believe we are now coming into a decade of more modest capital appreciation,” he said.

‘‘Over the next five years you will be doing well to get capital appreciation of 3 per cent per year on average, compared to 11 per cent over the last decade.”